Koninklijke Philips NV (PHG) 2003 Q3 法說會逐字稿

Good morning and welcome to the Genlyte Group and Thomas Industries 2003 third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn it over to Laurie Lyons of Thomas Industries.

Thank you. Good morning everyone and also welcome to those of you listening on our webcast. Today we will begin our conference with the Genlyte Group Inc.. Larry Powers, Chairman, President and CEO of Genlyte, and Bill Ferco, Vice President and CFO, will be providing an overview of the third quarter, followed by a question-and-answer session. Immediately following, we will hear from Tim Brown, Chairman, President and CEO of Thomas Industries, and Phil Stuecker, Thomas' Vice President of Finance and CFO. Following their comments, there will be another Q&A specific to Thomas Industries third-quarter earnings.

Before we begin, let me remind you that this morning's discussion may include forward-looking statements. These statements are based on our view of the world today and, therefore, are subject to risks and uncertainties, which are discussed in more details on both companies most recent Form 10-K. Obviously actual future results may vary.

I will now turn it over to Mr. Larry Powers of the Genlyte Group.

Thank you and good morning everyone. I apologize a little bit for my voice. I've had a bad cold, and I hope I can keep from going into a coughing spell. As we already stated in our release this morning, we were very pleased with the strength of our third quarter. The months of June, July and August, all three of those months were very surprisingly strong for our business. We did see some softening in September, and October looks more like the September type numbers so far. But, needless to say, we were very pleased with the numbers we are able to deliver based on the overall economy.

We still feel that the overall commercial and industrial construction markets are very weak. We get all the statistics from Neiman International Electric Manufacturers Association (ph), and most anything you read or dodge or anybody, shows that the numbers are down significantly this year and projected to remain relatively weak probably up through at least the first half of next year before we see any strengthening in the overall construction market at all.

Now I am not sure that I know exactly why our business has been as strong as it has, other than we feel that the renovation in the retrofit type markets is obviously got to be more robust than has been reported to us in the statistics that we have been reading because our overall businesses have been strong. We know that we had a very good year, a very good summer and particularly in school construction. We mentioned to you some time back that we had been a major factor in schools, but particularly Lightolier, one of our major companies -- in fact, our largest division -- redirected a lot of their sales efforts and energies toward the school and institutional type markets, and they have done a nice job and helped them grow their sales at a time when their traditional markets and retail construction and new office construction and hospitality have been very weak.

Now having said that, obviously the schools have now opened, and so the school market is going to be very soft, or there won't be much of it for the remainder of this year and through the first several months of next year. So that is going to soften, and we are not really sure what kind of impact that is going to have on our overall business, but we think it is going to be somewhat challenging going forward for the next several months.

We continue to feel a lot of cost pressures also. As we mentioned, freight continues to be a problem. There has been continued consolidation in our industry, and there is more and more pressure for freight to continue to go up. We are working very hard. We have a very good young man that manages our freight for us, and he has done a very good job of minimizing these increases, but the facts still remains that freight has continued to go up. We will continue to face, as we talked to you about before, with increased costs in all types of insurance. Healthcare is a significant problem that continues to go up, and we are looking for pretty significant increases again next year in those markets.

So we are still in a very challenging environment. There are few bright spots. As we speak, there is a major energy bill before Congress that we at least have some hopes that some portion of this bill, some form of this bill I should say, is going to pass. Assuming that some of the incentives for retrofitting lighting is going to remain in that bill, I think that could be a nice little shot to our industry next year, in fact over the next three to five years. There are still lots of old inefficient, magnetic, balanced fixtures out there with the old T12, the T12 lamp, which is actually (inaudible). You are not supposed to be able to produce it anymore, but it is still the number one selling lamp of the T40 fluorescent lamp that you can go down to the grocery store or any hardware store or DIY across this country. It is still the most popular lamp, and we really need to replace those lamps. Assuming that this energy bill passes in some form that give some emphasis and hopefully some incentives to retrofit these products, the bill as proposed recommends that the government, who is the largest owners of public buildings in this country or the commercial type buildings that we like to retrofit, they still have lots of those old inefficient fixtures in them. So if they take the initial initiatives and retrofit all the government buildings, it would be a real boom to our business I think, and then follow that up with incentives for other commercial and industrial establishments to retrofit and using more energy-efficient type products. It makes a lot of sense for our industry going forward, and we are hoping that can be a little spurt to our business next year.

I just returned recently from two of our major marketing groups, the IMark (ph) and AD, which are the independent distributors that have formed these marketing groups. They have an annual convention, and I just attended both of those conventions within the last 30 days. The overall mode there is still very much of concern with these electrical distributors. They have seen a slight improvement in their profitability, primarily because of cost-cutting and getting their business in better shape, their balance sheets and that. But all in all, their business is still very weak, and they are very concerned about the market. So there is not a lot of bright spots to talk about in the overall market conditions that we are seeing out there today.

We are continuing to work very hard to reduce our costs, improve our productivity. We've got major programs underway at all of our major plants. We are continuing to move production around to facilities, to take more production to Mexico, and to China where appropriate. I was in Mexico at our large Mexican facility within the last 30 days also, and you are seeing a dramatic shift in business moving from Mexico, now to mainland China. We flew into Chihuahua, and we visited some of the industrial parks there, and you cannot believe the change in the employment and what is happening in Mexico.

In fact, one of our major suppliers was in here meeting with me this morning, and he told me that for the first time since they have been in Mexico, which has been 15 years, it appears there may be a recommendation to have no labor increases in Mexico this year. We have been seeing -- the last couple years, it has actually been pretty modest, 3 to 5 percent type of increases, but he says they think they will see a 0 increase, and the recommendation is coming from the government and the labor unions this year on labor in Mexico so that they can more favorably compete with China.

So all in all, we still remain in a very competitive market. Every job is a major battle. We continue to see people price erosions. Some of the major retail type customers are now saying they are going to these reverse auctions, which have absolutely said that we refuse to participate in because we do think it's in our best interest. A lighting fixture is just not a lighting fixture. You can these in these reverse auctions, you can emphasize the quality and the better performance, and when you get better performing, higher quality products, there is no way you want to get involved in a reverse auction in our opinion just competing with people who just have very very poor performing, very low quality products. So we have chosen not to participate. We will participate in closed bids, but not in these crazy auctions because we don't think it is in the best interest of our industry.

But all in all, we are pretty pleased with the results that we have had year-to-date. The two acquisitions, Vari-Lite is continuing to improve, and we are getting -- the company is now profitable. It was not profitable the first half of the year. It was profitable in the third quarter, and we think we will continue to improve in the fourth quarter. It has been a little slower than we would like to see the improvements. They came out with a new fixture early this spring, which has just taken the market by storm, and everybody loves the product, but they have had some quality issues, particularly with getting some parts and things they need on time. It has been challenging for them to get the production up to speed, but they are making progress, and I think next year it should be a very good year for that company.

Shakespeare, the company that we acquired -- the fiberglass pool company we acquired in June, is doing very nicely for us. The utility market has been a little soft, but they have seen a little improvement in their business this year, and I think going into next year they will do very well, and that is going to be a very nice acquisition for us. So all in all, we are I think very well-positioned as a company have taken down our costs and performing reasonably well under the current market conditions. If we can get any topline growth at all, I think our company will do extremely well going forward. But it is going to be a challenging environment in I think the fourth quarter this year and going forward into the first half of next year.

With that, I will turn the time over to Bill Ferco and let him get into the financials in a little more depth with you, and then we will be happy to answer any questions that any of you might have.

Good morning everybody. As you saw in our release, third-quarter sales of 272.8 million were 9.9 percent over last year. Excluding the Vari-Lite acquisition and Shakespeare acquisitions, which were not in last year's number and who had sales of $17.1 million, so excluding those, our sales were 3 percent over last year. Year-to-date sales of 764.8 million are 5 percent over last year, and excluding the acquisitions, sales still were down about 6/10 of a percent over last year.

Good news on backlog. For the first time in awhile, our backlog going into the next quarter is actually higher, so we had an addition to record sales. We had record order input where our backlog going into the fourth quarter is now higher than it was at the same time last year. Operating profit for the third quarter was 36.5 million or 42.6 percent higher than last year. Our third-quarter operating profit benefited as we indicated in our release to the tune of 7.1 million due to the legal settlement, and without the settlement, operating profit still would have been 29.4 million or 15 percent higher than last year, which is an all-time record. Year-to-date operating profit of 80.3 million is 13 percent higher than last year, and without the Paden (ph) settlement, year-to-date operating profit would have been $74 million or 3.2 percent higher than last year.

Good news on gross margins for the third quarter. Our gross margins increased to 35.4 percent from 34.8 percent last year. It is really a combination of factors that contribute to that. I think the industry is getting a little bit more prudent in its pricing, and we are starting to see some firming of pricing and particularly in our proprietary-type products. I don't know if anybody listens to any of our competitors calls, but I think some of our industry is starting to pay more attention to margins. Year-to-date gross margin is at 34.9 percent, which is the same as last year.

Our foreign currency, if you might recall from our second quarter, we had a pretty difficult issue in the second quarter where our Canadian dollar got strengthened, and we had a $2.5 million loss due to the translation of monetary assets. During the third quarter of this year, we actually had a $113,000 gain compared to a $400,000 gain that we had in the third quarter of last year, so the gain was not as much as it was last year. We recovered some of the $2.5 million approximately loss that we had during the second quarter. However, the Canadian dollar since the end of the third quarter -- now during October, unfortunately has strengthened more, so it's going to be a detriment for the month of October.

In the selling, general and administrative expenses, we came in at 24.85 percent, which increased from 24.39 percent last year. The Canadian dollar had some of the impact there, but the key issue for us as Larry alluded to is cost increases in the medical, insurance, pension costs and general liability insurance area. The combination of just medical and pension costs is a cost increase of about $2.3 million compared to last year.

In the net income area, as you saw, our net income of $15.8 million is 43.9 percent higher than the 11 million we posted last year. Without the third-quarter settlement -- or without the legal settlement in the third quarter, net income would have been 12.9 million or 17.5 percent higher. Year-to-date income was $34.4 million or 13.4 percent higher than last year. And, again, without the settlement, it would have been about 3.6 percent above last year. Earnings per share at $1.16, 36 cents per share more than last year's 80 cents or an increase of 45 percent. And excluding the settlement, earnings would have been 95 cents, which is a 18.7 percent increase over last year.

Year-to-date earnings per share at 253 are 31 cents over last year, which is a 14 percent increase, and without the settlement, they would have been $2.32 or 4.5 percent higher. Our cash generation was extremely good during the third quarter -- nice improvement from the second quarter. What we define as cash generation is $43.8 million compared to $31 million last year. Working capital came in at 16.3 percent of sales at 172.6 million compared to 18.6 percent of sales or 192 million at the end of the second quarter, so we did a very good job reducing working capital this year, and hopefully we can continue that going into the fourth quarter.

We had a relatively good improvement in both receivables and inventory. Accounts Receivable at $174 million is 11.5 million higher than last year, and as a percentage of sales, it is at 16 percent, which is 50 basis points or .5 percent below last year. Inventory increased by 10.2 million to $140.8 million or 12.9 percent of sales compared to third quarter of 30.6 million or 13.2 percent of sales last year. So, again, on a percentage of sales basis, a reduction compared to last year.

As I pointed out in the press release, the acquisitions, Shakespeare and Vari-Lite, contributed to about $23 million of the increase in receivables and inventory. So if you take those out, we had some fairly nice improvements during the third quarter. Capital expenditures for the third quarter were 3.6 million, $2 million lower than last year, and year-to-date we are at $13 million, which is 1 million 4 million under last year.

With respect to debt or leverage, at the end of September, we closed with a net cash position, or debt minus or cash minus debt of $105.6 million compared to $63.8 million, and the only debt we really have left is primarily industrial revenue bonds, which was 16 million this year compared to $40 million last year. So a very strong balance sheet.

With that, I will turn it over to the operator for questions and answers.

(OPERATOR INSTRUCTIONS). Ned Armstrong, Friedman, Billings, Ramsey.

Just two quick questions. Are you able to quantify the actual effect the school market had during this past quarter?

We have not done it. We probably could, but we have not quantified it at this point in any detail. We are getting ready to do our budgets next week, and after that, we will have a better feel for the exact -- as we go through each of the individual companies, individual budgets, we will qualify.

You are not close enough to just ballpark it? Is it 5 percent or 15 percent or --?

It is not a huge percentage I can tell you that of our overall business. First of all, it is primary in the florescent, and florescent for us is a smaller portion of our total business than most of our competitors in total. As far as it relates to our overall business, I can assure you it would not be over 5 percent, probably far less than 5 percent of our total business.

My second topic that I wanted to ask about was the potential for the T12 retrofits. Do you have a sense as to how much of the installed base is represented by T12?

Yes, we do. I am trying to think if I know off the top of my head. It is an astronomical number. Something like -- I don't know -- 90 million fixtures or something out there. I used to know the number, and I do know it. It is a huge base. Any fixture installed prior to about 1985 has most likely got a magnetic T12 ballast, and then they even continue to install them afterwards. In fact, we were talking to one of the ballast companies today that it's amazing there is still a fair amount of magnetic ballast fixtures being installed. They are not installed in any T12s these days,, but it's amazing that anybody is installing a magnetic ballast.

But it's a huge retrofit potential out there if you to get people to do it. The problem we have in this country as you probably know -- some people don't like to hear you when you say this -- but the fact of it is we still have very cheap energy. We need gas to go to $4.00 a gallon to get people really serious about energy in this country. We just don't pay much attention to it.

Dennis Delafield, Delafield Asset Management.

Probably everybody knows this, but just a question since I have not called you for a long time. Is everything in Genlyte part of the joint venture, or which assets that you own are not in the joint venture?

Basically all the lighting assets, everything Genlyte has, is in the joint venture.

Cash and debt, everything is in the joint venture?

That is correct.

Tom Spiro (ph), Spiro Capital.

I was intrigued by your comments about the growing importance of China, and I wondered if you could expand upon that in a couple of respects? Number one, the imports against which we have to compete, and number two, what it may mean for our manufacturing base?

Well, there is no question that there is an unbelievable boom in China. Anybody who just picks up any newspaper today reads a lot about the numbers of jobs in that we have been losing to China. It started in Mexico, and now we are going to China in a big way, and I don't see that slowing down anytime.

Now there are certain types of products -- as an example, the high-volume florescent-type products, which have a minimal amount of labor in them, make no sense whatsoever to purchase in China. First of all, it is very difficult to forecast the job type business. Second of all, there are lots of different variations. It would be impossible to bring those types of products.

So there is always going to be a certain amount of products in our opinion that are going to be made here. That why we spent about $8 to $9 million last year in Sparta, Tennessee to retool some of our florescent-type products that only have probably a $1.00 or $1.50 worth of labor in them anyway. We debated on whether the take it to Mexico or whatever, but we believe that it was right to do it here.

Having said that, there are some of the smaller type products, small wattage HIV, a lot of recess of that type of product, that is coming in from China. Their quality is improving, and they are coming more and more of a factor, and we are watching that. We obviously bring in a fair amount of product today. Certainly our residential division brings in a lot of product from China. Most all of the decorative products are now coming in, and we also bring in a fair amount of parts. We do not bring in a large percentage of our (inaudible) business in finished goods inventory, but we bring in a fair amount of castings, injections, molding parts, those kinds of products. I don't see that stopping anytime soon.

We are expanding. We have people over there. We have lots of good vendors, people we are working with. We even debate ourselves as to should we actually own a factory in China? We think right now there is some very good sources and lots of different capabilities there, and there is no reason for us to own a facility there at this time, but we do have lots of very good vendors and people we work very closely with.

Is there much of an opportunity for us to sell product into China?

That will be the opportunity -- when we think that opportunity is right then for us to consider even owning a factory or a joint venturing with somebody over there in China, it appears there may be opportunity. Right now, most of the product that is being sold in China is pretty low-end, not certainly of the quality product we are used to producing; not the kind of things that are sold in this country. But as happened in Mexico, that will change over time we think, and there may be an opportunity for us to expand and grow our business in the Chinese market at some point.

(OPERATOR INSTRUCTIONS). Vince Morrison, Thrivent.

Ken Mortensen from Thrivent. Historically you have talked about there being too much capacity in the industry. Are you seeing any signs if that is the beginning to abate at all?

No. Not at all. I think it is still there. Some of the imports -- it is either portioned or unportioned depending on how you look at it. I will give you an example. When we renovated this facility we have down in Sparta, Tennessee, our intent was to combine our higher volume florescent-type products into one facility. We just did not need all these different facilities.

As we did that, the intent was not to significantly increase our capacity, but guest what? We did that anyway because putting all this new latest manufacturing equipment in and new methodologies and all the things we did all in new equipment, we ended up in that facility with a lot of increased capacity that we did not have before. That is basically happened not only to us but to our competitors. Nobody is really going out of business, even though some of it -- we think some of the smaller companies are struggling somewhat, but we don't see anybody falling by the wayside these days, so that capacity is still there. In fact, probably increasing, and that is somewhat unfortunate for our industry I think.

That is fair. Does that increase your operating leverage as well? Does it dramatically take up your operating margin potential?

I think it does and particularly in the long run. As business increases and as we get any improvement in the market itself, we think it gives us a lot of leverage, and we are going to be able to really capitalize all these investments in that that we have made. Right now we have all this capacity in that, but we don't want to go out and drive pricing down more just by doing stupid things, by pricing it low and trying to take market share. That is not our modus operandi.

We want make money on the things we sell. We put a lot of money into R&D. We sell a high-quality product, and we think we are entitled to make a fair margin on that. If the industry increases and we see any uptick in volume in total, we think it will really help our margins in that because we will be able to leverage the things that we have done.

There are no further questions. At this time, I would like to turn it over to Mr. Tim Brown of Thomas Industries.

Good morning everyone. Thank you. We were pleased to have record earnings per share in the quarter of 60 versus 49 cents in 2002. As previously announced, our equity earnings from GTG favorably impacted our results first from a good earnings quarter, as Larry commented on, but also, of course, from the settlement of litigation that net of expenses impacted the quarterly results by 8 cents. Even without the settlement, however, our earnings per share was positive in the quarter versus last year. You just heard Larry's comments, of course, regarding GTG, and certainly we were pleased with the results as Larry described in a challenging market that they do operate in.

In looking at our pump and compressor business, sales in the quarter were $89 million versus 59 million 2 in 2002. Included in our third quarter results of 2002 was only one month of operations from the former Rietschle companies. Our operating income, including corporate expenses, did decline in the quarter as previously announced or warned earlier this month, although our performance was better than we had discussed at that time due to primarily an improvement in overall performance.

Nonetheless, we did have a decline in operating performance that was attributable to a number of things. First of all, we did have delayed shipments out of Schopfheim, Germany, our single largest facility now around the world, and I will comment on that in just a moment. We continue to have lower margins in our North American medical market due to the impending move of a product line to China. It is underway right now, and we should start getting the benefit from that in the first quarter of 2004, as well as ongoing competitive pricing pressures in those markets.

We saw weakness in automotive sales into the applications that we sell in automotive, in particular from sales for the Hummer 2 project. We continue to say weak market conditions in two of the companies largest applications in Japan, oxygen concentrators and Freon recovery equipment, and we simply have to wait for those markets to improve. We do have some new products that we will be coming out with in 2004 to improve that overall performance.

In the quarter, we did have shutdown costs related to the Company's facility in Fleurier, Switzerland, and that was part of our planned consolidation of almost $400,000. As mentioned earlier, the performance out of our Schopfheim facility did impact the first two months of the third quarter, although we saw real signs of improvement in September. As discussed with the acquisition of Rietschle, Schopfheim acquired a new ERP system to better manage its business and to significantly improve the leadtimes and really the entire planning process that we have there. I think overall this implementation has been successful, although issues involving the changeover did really impact our shipments in July, only to be followed by the very heavy August vacation schedule in Europe where we probably had about only 50 to 60 percent of our workforce during that period. This impacted results considerably from this location, and we generated a much larger than normal backlog that we have begun to reduce certainly in the month of September. Our overall performance out of the Schopfheim operation in September was very much improved, and I think we've got some really really good people in Schopfheim that are working very hard, and I think they are making very real progress every month with the new tools that they had in hand.

When you take a look at the key markets that we have for the quarter and year-to-date, as I mentioned earlier automotive, we saw a decline of almost 17 percent in the quarter for automotive from the particular applications that we serve, including the Hummer 2. Year-to-date, though, we are up 26 percent. So while it has been a very strong market for us in the first three quarters, it was pretty weak in the third.

Environmental, as it has been for the full year, is pretty well flat both in the quarter and year-to-date. Our laboratory market actually in the third quarter was surprising strong, up about 17 percent, although for the full year it is only up about 5 percent. Our single largest market medical continues to be strong. We were up 15 percent for the quarter and 15 percent year-to-date. While those markets continue to be very good, the pricing in those markets is tough.

Industrial, which is a sign perhaps of commercial activity in the U.S., is up nicely about 8 to 10 percent both for the quarter and year-to-date. We did have some disappointing applications within food and beverage in the quarter, which has been a good application for us year-to-date, up about 10 percent, but for the quarter, it was down about 25 percent. Overall construction compressors, just as it has been all year, is down about 14 percent.

The single largest market for us with Schopfheim are our products and compressor sold into the printing market. As we have commented all year long, that market has been pretty weak for the last couple of years, and we think that it will probably be 2004 before we see any signs of much improvement in the printing market. Hopefully, we will see some signs of improvement in 2004 going into 2005. A bright spot in printing, however, has been in Asia where our shipments of compressors into the Asian printing market are up about 40 percent. Those are the major markets that we have.

As I mentioned before, the Hummer vehicle, I think last year in the fourth quarter we had very heavy shipments as we were ramping up our production of Hummer 2. That, of course, has settled down, and we won't see near the activity that we saw in the fourth quarter of 2003 as we did in the fourth quarter of 2002. And in conjunction with that, we are in the midst of a model change over in the fourth quarter from a single piston unit produced for that application out of Monroe, Louisiana to a two wobble piston application or solution that will now be produced in our Sheboygan, Wisconsin facility. So we have some change over going on there.

It has been a busy year in reorganizing and merging our operations around the world. No question we have not been as efficient as we would have liked to have been, but the businesses are coming together and we are creating a very good base and structure to grow and improve in the future.

Our new facility in Meningen, Germany is nearly complete, and we will be moving into that facility in December, where we will become much more efficient and productive. As we discussed previously, we shutdown our Fleurier, Switzerland plant in the third quarter and part of the rotary (inaudible) pumps that we will be housed in this new Meningen facility. In the fourth quarter, we will have about $750,000 of cost associated with that move that will hit our P&L. But just like Larry said, we face continuous cost increases just as they do and as he described. But I think we also continue to see more sales opportunities with the full range of Rietschle Thomas products that really would not have been as quickly identified as we see now with the combined operation. I think as we bring on some of these OEMs we have identified, it will have a positive impact as we move through 2004.

I think we do have a lot of new projects around the world for new applications, as well as the development of new products, so I think overall we are making good progress. We look forward to 2004. I think the economic conditions still, however, in Europe as well as the U.S. and Asia really outside of China where growth is just continues to be very strong, continues to be a little weak. So overall I think we are setting a good pace for future growth.

With that, I think I will turn it over to Phil for comments on the financials.

Thank you, Jim, and good morning. Our cash flow generated from operating activities for the nine-month period ending September 30th was approximately $18 million, a very nice improvement from the previous year's period of 14.3 million. Our balance sheet still remains very strong. As we close out the third quarter, we looked at our cash balance? We have approximately $21.5 million, up from our $18.9 million at year-end.

Our working capital was $88.8 million, and our current ratio was approximately 2.4 to 1. Our Accounts Receivable were $54.9 million, and the number of days sales outstanding is currently running at 55. This is a nice improvement as well from the year end when our days sales outstanding were running at approximately 62 days.

Our inventory balance is $51.2 million, and we are operating at an annualized inventory turn rate of 4. Our inventory is up from December balance by approximately $8.5 million. As we mentioned to you on our last conference call, we have built-up inventories from the beginning of the year due to a combination of our Fleurier plant shutdown that Tim mentioned that occurred in July, and also to generally improve on overall service and the on-time deliveries. However, the strength of the Euro and the British Pound has contributed to the overall increase. If you look at the exchange rate impact since December, this accounts for over half of the build in our current inventory.

Other key balance sheet numbers for the end of the third quarter are as follows -- current assets of $153 million; investment in GTG of 210 million; goodwill 62 million; net property, plant and equipment 99 million; total assets 547 million; notes payable of 5 million; portion of our long-term debt 10 million, and long-term debt of 104 million, and our shareholders equity of $353 million. Our debt to capital ratio at the end of September was 23 percent, and capital expenditures for the quarter and year-to-date were $6.9 million and $13.4 million respectively. Depreciation expense for the quarter and for the year was $4 million and 11.6 million respectively. Our estimated capital expenditures and depreciation expense for the year in total is approximately $19.5 million and $15.5 million respectively.

We would now like to open up the conference call for any questions that you may have of either Tim or myself.

(OPERATOR INSTRUCTIONS). Ned Armstrong, Friedman, Billings, Ramsey.

Can you shed a little bit of light as to how much Rietschle contributed this quarter relative to the same quarter in the prior year?

Yes. As far as the sales activity, you have to realize that we had Rietschle last year just for one quarter, and that was approximately 11 million in sales that we had. As it relates to the sales for the third quarter, we had about $38 million of sales of Rietschle's business, and I guess you could say on a year-to-date basis it is approximately $120 million. But it is getting harder and harder to continue to monitor that and break that out particularly as we continue to consolidate office system salesforces and so forth. So that is a harder number for us to maintain going forward.

Okay. Now staying with Rietschle, what types of challenges and successes are you encountering as you integrate the operation? Just a couple of examples of either would be helpful.

I would say that the challenges that we have as we integrate the facilities, first of all, is bringing the production levels and on-time service to a level that we would be happy with. I think we have increased the capacity in our Schopfheim facility, and as I said before, we have made some organizational changes within Schopfheim, and I think we are pretty pleased with the people we have there and I think their attitudes are very good. They continue to improve on the tools that have been put in place there now. I think that our single biggest challenge is production levels out of our facilities there.

Outside of that, I think the challenges are always is to bring a culture, a privately-held company into a public company. I think the reporting and measurements that we are putting in place now will help us better manage the business and help our managers in the countries around the world better manage their businesses. I think we have a big meeting in November bringing together all the managers from around the world and, again, discuss more and more the philosophies that Thomas Industries has in running its business.

I think we are seeing a lot of good successes in terms of coordinated sales activities, and we are running into more and more applications around the world either from former Thomas sales people with Rietschle product and Rietschle former salespeople finding applications for Thomas products. I think it is a very healthy environment, and we are sharing those applications with all of our people around the world. So I think those are some of the bigger successes and challenges that we face.

Are there any benefits that you have gained that were better than you thought they would be?

I think clearly the synergies that we talked about will be over the $4 million that we had talked about. I think just the coordination and understanding of the markets that we serve, I think long-term we are going to be very successful. I think we are putting in place and expanding our worldwide service operation where we provide excellent service to the major OEMs such as printing, packaging and the chemical facilities with our pumps. I think that is a real opportunity for us, and I think we are really excited about that.

Finally, how would you characterize your performance in the European versus the U.S. markets?

Our sales are probably about equal in both geographic areas. Actually they are probably performing equally as well.

You would say that the market conditions are roughly equivalent, or is one general market stronger or weaker than the other?

I would say they are probably about the same in relative strength. There are strong applications in North America. The medical for small pumps is much stronger in North America, but it is still a good market for us in Europe as well. Printing is clearly a strong market for us in Europe, not such a strong market in the U.S.

Mike Schneider, Robert W. Baird.

Maybe you could spend a minute first just on Rietschle. It seems like even you were surprised by the September shipments out of Rietschle after the ERP disruption. Give us some more color because it is odd that you preannounced and in effect hit the same number that we were looking for prior to the preannouncement. I am wondering what the biggest swing factors were in that?

I would say really the biggest factors were probably the performance out of the European operation, but we also had much improved results out of North America as well. The shipments, our guys did a really good job in increasing the shipments out of Schopfheim, and any time they go over a breakeven point of about EUR8 million in sales, it falls pretty good to the bottom line, and that is what they were able to accomplish. I would say early on in the month we really did not know, and we were concerned with their levels of shipments both in North America, as well as in Schopfheim.

But you preannounced on the 23rd of September, leaving basically seven days left in the month. What changed in that seven days?

Probably just we get a heavy amount of shipments out in the last two weeks every month. It just really came together at the end, and I guess that is all I can say.

Describe for us where you are now in that ARP implementation because the sense I got back in the July conference call was the European implementation was in, it was running, but that clearly was not the case. So where are we now in this implementation?

The implementation is that we have all the modules necessary to run the business. There is a couple of modules relative to capacity planning and customer relations management that we still have to put in as we move through 2004. But I think the basic manufacturing modules that we need to operate this business are in place, and our people are becoming more and more familiar with that every week. I feel very comfortable with it now.

What other ERP implementations are on the board for the next two quarters?

None really for the next two . Quarters as we move through the end of 2005 or 2004, we are looking at a new implementation in Pucheim, but that involves three of our locations within Germany, but nothing in the next two quarters.

Okay and switching gears to the medical market. Volumes look good, so it looks like its primary pricing that is pressuring you. What has changed in the last couple of quarters? The market has always been competitive, but is there one competitor that has gone aggressively after market share or a new platform that has been bid out in reverse auction or something?

No. We have not participated in any reverse auctions or anything like it. I think the one product we talked about in the past that we have moved to China that was delayed further than what we thought it was. We thought we would start to see some impact from it in the fourth quarter of 2003. That won't happen until the fourth quarter 2004. I guess even ourselves, as confident as we feel about ourselves and being able to bring onboard a product and even get it up and running in China, it took us longer with a relatively simple product. The rest of the competition is coming from, I would say, the threat of China competition, and we have to respond to that to maintain the market shares that we have.

Okay. In the automotive markets, I guess just generally speaking, you mentioned 2004 you had a nice new platform or pipeline of new products. What types of applications could be winners like the automotive applications have been this year?

We've got some that we are working on. I would say automotive, medical, environmental. We have got some nice applications that if they happen would be real good for us.

Could you give us some color on each?

I would rather not because they are fairly proprietary, and we have got nondisclosure agreements.

And shutdown costs, you mentioned 750,000 in the fourth quarter. What should we look for in 2004?

In 2004, we take a look at all of our facilities every year. There is a possibility of even some further consolidation in 2004.

Rietschle just as a business unit now, would you consider it fully integrated salesforce, backoffice, plants? Give us a sense of what is left.

I think for the most part we have gone a long way on facility consolidation. I would say from a salesforce consolidation we have organized ourselves around the world where we have essentially one salesforce in most major countries with the exception of the U.S. and Germany. In the U.S. and Germany, we do have two separate salesforces selling the individual markets that they are so accustomed to selling, and I would say that is primarily because the size of those individual markets, both for the former Thomas and the former Rietschle products, are so large in those two countries that I think we can specialize.

Just a couple of questions. Phil, the after-tax impact of the gain, you gave us the pretax of 2.2 million. It looks like the tax rate on that have differed from the total corporation. I wonder if you have the after-tax amount?

It was approximately 1.4 million net.

Okay. Looking into the fourth-quarter now, you did about 5.3 million I guess in operating income. It looks like there is an additional 300,000 or 350,000 in facility costs that will hit the P&L. Is there any reason with the backlog build probably still in place in Rietschle that you would not show year-over-year improvement in the fourth quarter? Last year in the fourth quarter, you did 49 cents and about 6.9 million in compressor operating income.

Michael, there are a couple of things on that. One, part of our 49 cents last year is right now is GTG. We cannot comment or make any kind of projections on that. The other thing I think as Tim referenced earlier, we are looking at $750,000 of relocation costs in the new Meningen facility. So you can certainly factor the fact in that we are going to have that cost hitting the pump in compressor unit. But I don't think it is appropriate for us to comment any further than that.

The other thing that we will have to watch is that even though we shutdown the Fleurier facility, we still have some manner of ongoing costs, probably have another $100,000 of cost in the fourth quarter, and as I indicated before too, we could not even keep up with production for Hummer 2 in the fourth quarter last year that was so strong, and we will not see that strength in the end of this year.

That is a fair point. Just on the synergies, your $4 million target, Tim, you indicated you probably would exceed that in '04. Do you have a sense of how much of actually captured of that to date?

I think we are operating -- this year we will capture P&L-wise this year probably between $1.5 and $2 million, and then I think for next year we are looking at that 4 million plus.

So in incremental, probably another 1.5 million to 2 million?

Probably not quite that strong.

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